Opinion 5 minute read

How do financial compliance challenges impact the CFO’s agenda?

14 June 2018

In a global environment, Chief Financial Officers are mainly concerned about maximising revenues and reducing costs. But compliance is an ever-present element that will influence your choice of growth strategy – and the outcome.

Performance management is of course, a key area of focus for a Chief Financial Officer. But increasingly underlining the need for real-time, accurate and relevant data by which to gauge financial performance, is the issue of compliance. The same can be said when it comes to the CFO’s key focus areas of growth/growth strategy and process optimisation.

High, double-digit growth inevitably involves expansion into new jurisdictions, often through mergers and acquisitions, and with this comes critical local compliance factors. Likewise, while the CFO is looking to increase the efficiency of company operations and reduce costs, he or she must also be examining how this can be done while meeting all necessary rules and regulations.

To successfully achieve this trifecta of strong company performance, growth and efficiency, the CFO needs to have the right level of information; including the right information on the often very unique financial compliance requirements in every jurisdiction in which they operate.

Compliance impacts the cost of doing business

As part of TMF Group’s research for its 2018 Financial Complexity Index, accounting and tax experts in 94 jurisdictions globally were asked to rank, in order of importance, a number of complexity issues faced by international companies when setting up in a new jurisdiction.

At a global level, the top three issues were deemed to be:

  1. Risk of non-compliance with local regulation
  2. Accounting complexity
  3. Tax rules and procedures.

These three items impact not just the decision to set up in a new jurisdiction, but also the extent to which the CFO can achieve expected targets.

When you are setting up in a new jurisdiction, you need to make sure you are operational within the right time frame, within the costs established in your business plan, and sometimes the details make all the difference.

Details such as:

  • the amount of time it takes to incorporate locally
  • how long it will take to become registered from a tax perspective
  • whether tax registrations are completed as a separate process from entity incorporation
  • document preparation time
  • local directorship requirements.

In some countries such as Australia for example, an Australian citizen must act as director of the local company. All the aforementioned items contribute to a potential increase in the initial setup estimates because it takes time, in most cases requires specialist advice, and could increase overall budgets - due to numerous processes and administrative items.

Compliance impacts timelines

The finer points often have the most pronounced impact when it comes to setup costs and timeframes, and they can very easily see you deviate from your initial business plan.

Accounting in particular often has very localised requirements that the CFO must factor in. For example, local compulsory chart of accounts and the prescribed format of the accounting report. If you are establishing operations in France, there is a compulsory local chart of accounts that you must follow; the format of the trial balance, the general ledger format is prescribed by law, and you need to be able to prepare an electronic file of all accounting transactions. In Mexico and Brazil there are also particular accounting reporting requirements, including unique specifications with regard to how reports should be prepared.

All of these compliance specifications have time and cost consequences if not addressed correctly. You might not be able to use your global ERP, or if you are still able to use it, you discover that you need to make additional investments to localise it and ensure it adheres to local regulations. If you decide to use a different software in-country, you may need direct reconciliation of local and corporate accounts. Additional effort, resources and tight internal controls are required to ensure alignment.

Compliance impacts technology and processes

Tax authorities in many jurisdictions are now embracing technology and either have plans for - or are already rolling out - solutions in more and more compliance areas.

Brazil is a very good example with their digitisation program. Moves by authorities to digital platforms for the collection and analysis of tax data is a trend that we see across the world. In Europe, more countries are introducing technology to collect VAT data. The UK has announced a program called ‘making tax digital’ from 1 April 2019. And in Asia Pacific, technology is increasingly being adopted for invoicing.

Not complying with local regulations, especially from a tax perspective, comes with a price – a financial one in terms of fines and penalties that can affect the company cash flow. But it could also be as severe as having your operations discontinued in a country, and the reputational loss that comes with it.

It therefore comes as no surprise to see CFOs increasingly preoccupied with mitigating such potential operational losses. They want to take all necessary steps to ensure their operations align with local rules.

Compliance should be at the heart of all decisions by a CFO – from those pertaining to process optimisation to growth and expansion. Companies must assess the impact of their plans on local compliance processes and the extent to which potential changes may increase any risk of non- compliance.

Talk to us

Particularly when entering a new market, it’s essential to understand the frequency of local financial rule changes and their impact. The way in which authorities provide notifications is not always optimal for companies, with short turnaround times to implementation.

Working with a team of experts on the ground, who speak the local language and understand the local nuances can be key to business success.

Need more information? Get in touch with us today.

Find out how our accounting and tax services help our global clients to focus on their core business.

Written by

Emine Constantin

EMEA Head of Accounting and Tax

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